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Tax Compliance and Psychic Costs: Behavioral Experimental Evidence Using a Physiological Marker

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  • Uwe Dulleck
  • Jonas Fooken
  • Cameron Newton
  • Andrea Ristl
  • Markus Schaffner
  • Benno Torgler

Abstract

Although paying taxes is a key element in a well-functioning civilized society, the understanding of why people pay taxes is still limited. What current evidence shows is that, given relatively low audit probabilities and penalties in case of tax evasion, compliance levels are higher than would be predicted by traditional economics-of-crime models. Models emphasizing that taxpayers make strategic, financially motivated compliance decisions, seemingly assume an overly restrictive view of human nature. Law abidance may be more accurately explained by social norms, a concept that has gained growing importance as a facet in better understanding the tax compliance puzzle. This study analyzes the relation between psychic cost arising from breaking social norms and tax compliance using a heart rate variability (HRV) measure that captures the psychobiological or neural equivalents of psychic costs (e.g., feelings of guilt or shame) that may arise from the contemplation of real or imagined actions and produce immediate consequential physiologic discomfort. Specifically, this nonintrusive HRV measurement method obtains information on activity in two branches of the autonomous nervous system (ANS), the excitatory sympathetic nervous system and the inhibitory parasympathetic system. Using time-frequency analysis of the (interpolated) heart rate signal, it identifies the level of activity (power) at different velocities of change (frequencies), whose LF (low frequency) to HF (high frequency band) ratio can be used as an index of sympathovagal balance or psychic stress. Our results, based on a large set of observations in a laboratory setting, provide empirical evidence of a positive correlation between psychic stress and tax compliance and thus underscore the importance of moral sentiment in the tax compliance context.

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Bibliographic Info

Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2012-19.

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Date of creation: Nov 2012
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Handle: RePEc:cra:wpaper:2012-19

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Keywords: tax compliance; psychic costs; stress; tax morale; cooperation; heart rate variability; biomarkers; experiment;

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References

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  1. A. Mitchell Polinsky & Steven Shavell, 1999. "The Economic Theory of Public Enforcement of Law," NBER Working Papers 6993, National Bureau of Economic Research, Inc.
  2. Benno Torgler, 2003. "Tax Amnesty and Political Participation," Working papers 2003/07, Faculty of Business and Economics - University of Basel.
  3. Brandts, Jordi & Garofalo, Orsola, 2012. "Gender pairings and accountability effects," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 31-41.
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  13. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
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Cited by:
  1. Benno Torgler, 2014. "Can Tax Compliance Research Profit from Biology?," QuBE Working Papers 025, QUT Business School.
  2. Jonas Fooken & Markus Schaffner, 2013. "The role of psychological and physiological factors in decision making under risk and in a dilemma," QuBE Working Papers 010, QUT Business School.
  3. repec:qut:qubewp:wp003 is not listed on IDEAS

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